Every time I go to Honolulu, I spend a Sunday afternoon looking at dream homes. As I get older and think about family, I day dream of having a large flat lot so my kid(s) can run around and play in the grass. I dream about being walking distance from the beach so we can play in the sand and go snorkeling when he’s big enough to swim. After the beach, I imagine showering off outside and relaxing on my lanai in 76 degree weather while the palm trees rustle in the background.
I’m always dreaming because it’s free, fun, and motivating. When I was a kid, I dreamed of getting a Nintendo, but never did. As a result, I just befriended someone who had one and went over to his house to play. When I was getting whipped at work as a recent college grad, I dreamed of breaking free by 40. As a result, I saved everything I had to build passive income in order to have options.
After retiring from the corporate world, you really don’t need much to survive. Once you’ve got the $20,000+ a year in private school tuition budgeted for the next 17 years (!), the next great expense is a sweet pad, if that’s what you want.
I’m obsessed with real estate because it can be enjoyed and it can create wealth at the same time. I don’t crave living in a huge house due to the property taxes and upkeep. It’s why I downsized to a modest ~1,910 square foot home back in 2014. But every time I visit one, my desire for a mega mansion goes up! Here’s a fun post about my dream of buying a sweet home by the beach one day.
The Dream Home
We’ve been through my thought process about buying a dream home with my parents before. It looks like this plan isn’t going to fly because my parents are happy with things just the way they are. Even though their house hasn’t been remodeled since it was first built in the 1980s, they’re content. They’ve added AC and changed all the windows and sliding doors. All they really need to do is swap out the old kitchen appliances, paint the walls, and maybe get some new carpeting.
So now that my parents and their balance sheets are out, I’ve got to figure out a plan to come up with all the finances myself. The best way to do so is to first decide what type of house I’d love to live in and how much it would actually costs.
The below is a video of a brand new, 5 bedroom, 5.5 bathroom, 6,066 square foot home on a 10,257 foot lot one block from my favorite secluded beach. It’s essentially the perfect house for a not so perfect price of $4,950,000!
I gotta do a lot more blogging to come up with this type of cash. Have a look and let me know what you guys think.
* A family of four plus mom and dad
* A family of three plus mom and dad
* A family of three plus mom and dad plus a housekeeper
* A family of three plus a housekeeper
* A family of three
* A family of four
* A family of five
Anything less than three people would make this house feel too lonely and wasteful. Any more than six and it’ll feel too crowded.
Action Plan To Achieve My Dream
To buy a $5,000,000 property I’ve got to either come up with $5,000,000 in cash or come up with $3,000,000 or more and take on a $2,000,000 mortgage or less.
A property like this Hawaiian house in a similar quality area in San Francisco would cost over $12,000,000 based on a conservative price of $2,000/square foot. The reality is, such a property is unobtainable in San Francisco for less than $15,000,000 due to it’s 10,250 square foot lot. 6,000 square foot+ sized houses in San Francisco go for $15,000,000 and are on only ~5,000 square foot lots.
In other words, this Hawaiian home is relatively good value!
Here’s a 6 bedroom, 5.5 bathroom house, 5,455 sq ft on a tiny 3,500 sq ft lot that just sold for $19,466,666! WHAT? Are you kidding me? That is absolutely ridiculous!
The easier way to buy this house is to come up with a $3,000,000 downpayment and get a $2 million mortgage for ~$10,000 a month at today’s rate. To be able to qualify for a $10,000 a month mortgage payment, the bank will probably require the borrower to make at least $25,000 a month, or $300,000+ in gross income a year for the past two years.
The only way for me to legally come up with a $3,000,000 downpayment is to simplify life and sell my two self-managed San Francisco rentals.
Rental #1: Zillow value: $3,300,000. Realistic value: $2,500,000. Mortgage left: $800,0000. Net proceeds after 5% commission and transfer tax: $1,560,000. Gross rental income lost: $9,000 a month. Net rental income lost: $5,559.
Rental #2: Zillow value: $1,200,000. Realistic value: $1,050,000. Mortgage left: $0. Net proceeds after 5% commission and transfer tax: $986,500. Gross rental income lost: $4,300 a month. Net rental income lost: $2,940.
Total money raised: $1,560,000 + $986,500 = $2,546,500
Total gross passive income lost: $13,300 a month
Downpayment Deficit: $3,000,000 – $2,546,500 = $453,500
Damn! Not enough money!
I could sell my Lake Tahoe vacation property, but I don’t think I’ll get more than $100,000 net from the place since it hasn’t recovered back to my original purchase price. I’ve got a property management company who handles everything, so the property doesn’t take any time away from my life at all.
I could sell my Golden Gate Heights primary residence to extract about $800,000, but I think Golden Gate Heights has the most upside in San Francisco due to its quiet neighborhood, vicinity to good schools, predominance of single family homes, incredible panoramic ocean views, and relatively good pricing of homes below $2,000,000.
Besides, I’d love to have a place in San Francisco whenever I come back and visit. There’s nothing like living in your own familiar home compared to a random rental or hotel room. Also, I’m afraid that if I sell all my San Francisco properties, I’ll never be able to get back in due to continued price inflation.
Losing $8,499 in net rental income a month and paying 5% selling commissions plus transfer taxes and fees seems like a bad idea. The original plan was to keep the rental properties to pay for my retirement. However, the older I get, the more I don’t want to manage my rentals. I’m strongly considering hiring a property manager as an alternative to selling as well.
Fortunately, after almost eight years of blogging, I don’t need to depend on my rental income for retirement survival anymore. It’s just a little riskier to rely on my online income because it’s less stable than rental income.
To come up with the $453,200 downpayment deficit, I’ll just need to work harder for the next couple of years. I don’t want to sell down other asset classes because I want to retain a proper net worth allocation mix.
The positives of selling the two main rentals and buying this dream home:
* $30,000 less in SF property taxes a year, but it will just turn into $30,000 in Honolulu property taxes
* No more tenant hassles
* Taking profit in an expensive market and reallocating proceeds to a less expensive market that’s weak in the $2,000,000+ range
* The ability to do a tax-free 1031 exchange
* Unlocking sunk capital for a better lifestyle instead of more income
Don’t Wait Until You’re Too Old
Ideally, I’d like to keep all my rentals and buy this type of dream property. But that’s not possible with my currently liquidity. Based on my current rate of savings, it would take me about 10 years to come up with the downpayment. That means I’ll have just turned 50, and who knows whether I’ll be alive by then. Further, the $5,000,000 price tag might appreciate to $6,000,000 by then using a modest 1.8% annual growth rate.
The older I get, the more I want to live it up before I die. I’ve seen too many people work so hard and die with way too much left over. The one material thing I appreciate more than anything else is living in a nice home.
Last year, I learned from a Honolulu realtor hosting an open house that the seller was 80 years old and had finally bought an ocean front property he’d been wanting for years. The same realtor told me this year that the 80 year old man had a heart attack and is in and out of the hospital. Things don’t look good.
I don’t want to wait until I’m 80 to live the dream.
For those of you who can afford to own a beach front property, here’s one for you that’s currently asking $22,800,000. It’s got seven bedrooms, 10 bathrooms, 8,500 square feet of living space, 0.85 acres, with just killer, killer views!
Explore real estate crowdsourcing opportunities: If you don’t have the downpayment to buy a property, don’t want to deal with the hassle of managing real estate, or don’t want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.
Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you’re looking for strictly investing income returns. Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It’s free to look.
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Updated for 2019 and beyond.